A customer paid cash on delivery and now wants a refund. What does the system do?

The money side is yours, because no money ever moved through us. If the order is still live, cancel it with a reason and the customer is told, and stock, a coupon use and any loyalty reward go back. If it was already delivered, only the owner can cancel it, the managers' group gets an alert naming who and why, and the refund is yours to arrange by hand. Store credit under Marketing → Store credit is often the better answer: the customer keeps the value with you and spends it at the counter. The Orders & delivery tab in the docs covers cancellations.